Developers' new room service

Before their hotels are even built, developers are selling rooms to investors, who will get a return based on the occupancy level.

Buying room space in a hotel that has not been built, when even property experts are unsure of the risk, might seem either very bold or very foolish. But Saeed Currimjee, the managing partner of Al Jabal Real Estate and Al Jabal Holdings, a Dubai-based real estate developer, has already tested this type of property investment and is promoting its potential, even at a time when the hotel industry itself is bracing for the impact of a global recession.

Back in 2005, Mr Currimjee had reservations about the real estate market, or "bubble" as he described it, and decided to invest in a "buy-to-let" hotel property, which was part of The Cove project, a beachfront resort developed by Egypt's Orascom Hotels and Development in Ras al Khaimah (RAK). "I bought a beachfront villa, which would be let out because I didn't want to take the risk of the highly unpredictable property market," says Mr Currimjee. "And during the process of buying the property, I was a first-hand witness to the high level of demand this concept was generating."

Today, several regional property developers are following Orascom's lead and are introducing the buy-to-let hotel concept to the UAE to woo investors wary of the impact of the global economic slowdown. "This is a good time to be introducing these projects where the risk factor is less of an issue because the project will be managed by a well-known hotel group, increasing the chances of higher returns," says Mr Currimjee.

Last month, Al Jabal Real Estate announced plans to develop a 500-room hotel in Ajman and will soon offer investors an opportunity to buy hotel rooms under a deal that sees their returns based on occupancy levels, says Mr Currimjee. "If you buy a house today and rent it out, your investment return would be in the range of 5 per cent to 8 per cent, but if the hotel has 60 per cent occupancy, the investor's returns would be in the range of 16 per cent."

The Crescent Star is a 33-storey, four-star hotel-apartment property in Ajman's Marmooka City, a 30-minute drive from Dubai airport. The project's management expects it to be completed in 40 months and has invested about US$80 million (Dh293m). Earlier this year, Al Jabal Real Estate launched Crescent Towers, which includes three 18-storey towers, also in Marmooka City, and is slated for completion by 2011. "The reason we are developing properties in Ajman is because it is five times cheaper than it is in Dubai," says Mr Currimjee.

To buy into the hotel costs from Dh547,500 for a 520 square foot room to Dh1 million for a 2,000 sq ft room. "The rooms are fully furnished and WiFi is free of charge," says Mr Currimjee, adding that there are no limitations on foreign investors. The hotel plans to offer all the facilities normally found in a four-star property, including meeting areas, a pool, health centre and retail shops. However, many people still confuse buy-to-let with timeshare, which are different concepts. "With timeshare you don't get a return on your investment, you just get time slots where you can spend your holiday in a certain destination," he explains. "The concept of buying a hotel room to let is not new, it has been around for years in Europe, and right now in Dubai there are a handful of companies that have offered it."

These investment schemes are also available in the UK, Spain, Germany and Portugal - with varying claims of success. Most analysts believe that the concept is relatively new on a global level and to some extent untested. "It is too early to judge the long-term prospects, there are several projects under way, some are believed to be on hold because of the credit crisis and we recently saw Guestinvest in the UK go into administration," says Rohit Talwar, the chief executive of the UK-based hospitality consultancy Fast Future.

"The company had bought five luxury London hotels at the height of the boom in the UK property market and invested heavily in refurbishment. It then got into trouble because of financial difficulties at HBOS - the bank that was its lead investor and debt financier." Mr Talwar says other developers claim they have a different business model and are more robust - but the reality is that they still depend on hotel guests and leisure users to provide the returns to room investors. "And these markets are expected to get a lot worse before they get better."

An official at RAK Investment, which partly owns the The Cove project, says the concept is proving successful in the UAE, as the 70 villas the project was offering under buy-to-let contracts have sold out. "The main reason we decided to adopt this concept is because the hotel we have in the project has 200 rooms and we know that demand is going to be high, given the fact that this is the only complete project in RAK and the villas would add about 140 rooms to the property," he says.

But unlike the Orascom deal, which states that if the owner of the room decides to use it for four weeks of the year then there would be a guaranteed 7 per cent return on the investment for the remaining 11 months, Al Jabal Real Estate does not guarantee a rate of return. "Our conditions are a bit different because we know that 7 per cent return is not that appealing. That is why the returns will depend on the occupancy rates," says Mr Currimjee.

After three years, Orascom also offers owners the option of either residing at their property or selling it back to Orascom at the market value while taking advantage of a fixed capital appreciation, or renewing the agreement with the company to continue receiving guaranteed returns on rent. Mr Currimjee says: "We do want to discourage flipping of property - which is very common here in the UAE, when investors buy a property for a few months and resell it - but at the same time there are no restrictions on when he can sell."

Al Jabal Real Estate is finalising a contract with a hotel management company to run the hotel. "The management company will take a share in the profits, and the rest will be equally divided by the room owners, so no matter how many times your room has been occupied you would still get an equal share." The plan may seem a good deal for investors, but analysts are still wary of the industry's prospects in the coming two to three years.

"Despite the bravado of some Middle East hotel owners and operators, the reality is that we will almost certainly see the downturn hit the hotel sector quite hard and drive down demand and average revenue per room night," says Mr Talwar. "This is already happening to hotels all over the world. This could make the financial returns on buy-to-let hotel rooms look less attractive, or indeed very risky." [e-mail]